Becton, Dickinson and Company — Q3 FY2011 Form 10-Q
Business context and reporting period: Global medical technology company with Medical, Diagnostics and Biosciences segments. The quarter ended June 30, 2011; comparisons are with the quarter ended June 30, 2010. Year-to-date figures cover the nine months ended June 30. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $2,014.1 | $1,830.9 | $5,778.1 | $5,499.1 |
| Operating income | $471.7 | $423.0 | $1,325.1 | $1,266.3 |
| Continuing operations income | $338.1 | $294.2 | $963.4 | $883.3 |
| Net income | $343.1 | $306.9 | $971.0 | $920.9 |
| Diluted EPS, continuing operations | $1.51 | $1.23 | $4.23 | $3.66 |
| Total diluted EPS | $1.53 | $1.29 | $4.26 | $3.82 |
- Q3 revenue increased 10%, driven by 6% volume growth and an estimated 5% favorable currency impact, partly offset by approximately 1% price declines. Nine-month revenue rose 5%, including an estimated 2.5% favorable currency impact.
- Q3 gross margin was 52.7%, up from 51.7%; management attributed improvement to currency and operating performance, including product mix, productivity and lower start-up costs. Nine-month gross margin was 52.6%, versus 52.0%.
- Q3 segment revenue growth: Medical 10.5%, Diagnostics 9.6%, and Biosciences 9.3%. Segment operating income was $324.2 million, $164.3 million and $89.9 million, respectively. Biosciences’ Q3 operating margin fell to 26.6% from 28.2%, primarily reflecting Accuri-related intangible amortization and higher raw-material costs.
- Nine-month continuing operating cash flow was $1,174.5 million, compared with $1,114.2 million. Continuing investing cash use was $831.0 million; capital expenditures were $321.3 million. Share repurchases were $1,272.8 million and dividends paid were $272.7 million.
- At June 30, cash and equivalents were $1,158.0 million and short-term investments were $763.3 million. Total debt was approximately $2.7 billion, or 33.5% of total capital, versus 23.7% at September 30, 2010. Long-term debt increased to $2,485.0 million from $1,495.4 million.
Changes, outlook and management commentary
- Medical, Diagnostics and Biosciences all grew, with international sales and emerging markets supporting results. Western European demand was weaker amid austerity measures and lower healthcare utilization. Pricing continued to decline.
- Management estimated the Japan earthquake and tsunami would reduce FY2011 revenue by about $15 million and continuing-operations diluted EPS by approximately $0.05; Japanese operations were reported fully operational.
- BD expected full-year FY2011 share repurchases of approximately $1.5 billion. The filing does not provide a clear broader revenue or EPS forecast.
- BD acquired Accuri Cytometers for $205.0 million net of acquired cash in March 2011; results are included in Biosciences. The company signed a definitive agreement in July 2011 to acquire Carmel Pharma, with closing expected in Q4 FY2011.
- Management stated cash from operations and available cash were expected to meet normal operating needs. A $1 billion credit facility had no borrowings outstanding; $200 million was outstanding under the commercial-paper program. The company reported substantial covenant headroom, with its interest-coverage ratio ranging from 21-to-1 to 31-to-1 over the last eight measurement dates.
Risks, contingencies and unusual items
- Antitrust class actions remain unresolved. A proposed $45 million distributor settlement had been accrued, but the trial court denied approval; the appeals court allowed an interlocutory appeal in July 2011. BD could not estimate additional reasonably possible losses.
- In RTI patent litigation, an appeals court reversed infringement findings for BD’s 3ml Integra products but affirmed infringement for discontinued 1ml products. RTI’s antitrust and false-advertising claims remained pending, with trial scheduled for January 2012; BD could not estimate potential losses.
- Gen-Probe patent litigation seeks damages and injunctive relief; BD could not estimate potential losses. Management said it believed it had meritorious defenses. The filing cautions that litigation charges beyond recorded accruals could materially affect results or cash flows.
- Other notable exposures include government receivable collection risk, sovereign austerity and pricing pressure, foreign-exchange movements, oil-based resin and raw-material costs, product safety or regulatory actions, and pension-plan assumptions. The 2.3% U.S. medical-device excise tax was scheduled to begin in January 2013 and would apply to an estimated 80% of FY2010 U.S. revenue.
- The filing reports no material change to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects underlying volume and operations versus favorable foreign exchange.
- Whether pricing pressure, Western European demand weakness and government receivable risks intensify.
- Developments and potential financial exposure in the antitrust, RTI and Gen-Probe matters, including the status of the $45 million settlement accrual.
- Debt, repurchase pace and liquidity following increased borrowing and substantial share repurchases; confirm progress toward the stated FY2011 repurchase estimate.
- Accuri integration and amortization effects, the Carmel Pharma transaction and the eventual impact of the 2013 device excise tax.